India remains highly vulnerable to risk on, risk-off FII trades in 2013

Updated: Dec 27 2012, 05:58am hrs
Jimmy Patel

Despite the recent rally, Jimmy Patel, CEO of Quantum Asset Management Company, views current equity valuations as reasonable and is bullish on the market's long-term potentials. However, Patel cautions that India remains highly vulnerable to risk on, risk-off FII trades in 2013, which could cause volatility in the short term. In an interview with Ashley Coutinho, he advises retail investors to invest through SIPs. Excerpts:

What is your outlook for the equity market in the year ahead

The government has started its disinvestment programme for the current fiscal and has hung the open sign for foreign retailers. If foreign investment in insurance is increased, we would see most foreign owners bringing in capital to increase their stake. The banking amendment will pave way for a roadmap towards awarding new bank licences. All this would be a big sentiment boost for the markets.

We remain optimistic about Indian equities in the long run. Despite the double digit rally in 2012, we see current equity valuations as reasonable. We remain hopeful of India continuing to record GDP growth of 6.5-7% over a long term, irrespective of global uncertainties.

One of the positive factors that will work for our economy is the consistent growth of domestic consumption. India is a relatively young country and we are consuming more than before, a trend which is likely to continue in near future. The Indian private sector also has the intent and the managerial talent to tap into this emerging demand. However, the biggest hurdle both public and private players face is the lack of infrastructure and the slow rate of growth in that sector.

What are the global cues to watch out for

Given the structural long-term challenges that both the US and Europe face, global markets have been volatile. A lot will depend on regulatory and government decisions that the beleaguered countries make and there are no easy answers to solve the problem that developed economies are now facing. Since Indian markets have been reliant on overseas inflows to support domestic markets, we remain highly vulnerable to risk on, risk-off trades. In short-term, our markets will continue to be governed by volatile FII inflows

SIP numbers for mutual fund industry have not picked up this year. What is your assessment

The industrys AUM corpus has consistently eroded over the last four years and the number of SIPs have been stagnating or declining. But there is no reason why SIP numbers cannot pick up. If the industry invests in transparency, takes the right initiatives towards investor education and markets mutual funds as a sound investment option, things can change.

Fortunately, we have not experienced such outflows in our schemes and, as of November 30 this year, about 40% of our total investor folios were under SIP. It has been our understanding that SIP investments work well with retail investors as they do away with the hassles and paperwork of investing through other modes of investments and are popular for reducing risk because of rupee cost averaging.

What would be your advice to investors

We see India growing 7% in long term. Our advice to investors would be to continue participating in this growing market either through equities or debt, depending upon their stage in the financial cycle and risk appetite. Dont look at making short-term gains in the near future; rather look at your financial goals and invest prudently so that you can achieve those goals as quickly as possible.Retail investors should be disciplined and invest through SIPs rather than trying to time the market.

At a time when all mutual fund houses have been struggling, what are the challenges specific to small fund houses

The Indian MF industry needs to break the myths of size, reach and sponsors strength and establish the fact that mutual fund is a pass-through medium of investment. The war chests of smaller fund houses are not as big as those of the top 5 fund houses. However, there is no reason why small fund houses can't grow and do well in the future if money is channelised in the right manner to reach out to and educate investors. We need to tell the average investor that they can achieve their financial goals by investing in the right instruments at the right time.